Are Tax Havens Moral or Immoral?

The bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.

But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policy makers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.

Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.

And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.

To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.

There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.

If lying is immoral, this is a quick black mark on Mr. Vallely rather than tax havens. I’ve already explained, in a post eviscerating an empty-suit Senator from North Dakota, that a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.

Now that we’ve established that the author is a careless and know-nothing hack, let’s see what else he has to say.

Are there any legitimate reasons why anyone would want to have a secret bank account – and pay a premium to maintain their anonymity – or move their money to one of the pink dots on the map which are the final remnants of the British empire: the Caymans, Bermuda, the Turks and Caicos and the British Virgin Islands?

As this video explains, there are billions of people around the world that are subject to state-sanctioned (or at least state-permitted) religious, ethnic, racial, political, sexual, and economic persecution. These people are especially likely to be targeted if they have any money, so the ability to invest their assets offshore and keep that information hidden from venal governments can, in some cases, be a life-or-death matter.

And let’s not forget the residents of failed states, where crime, expropriation, kidnapping, corruption, extortion, and economic mismanagement are ubiquitous. These people also need havens where they can safely and confidentially invest their money.

The author of the column is probably oblivious to these practical, real-world concerns. Instead, he is content with sweeping proclamations.

But if he is against unfairness, cheating, and injustice, why does he want to empower the institution – government – that is the source of oppression in the world?

To be fair, our left-wing friend does attempt to address the other side of the argument.

Apologists insist that tax havens protect individual liberty. They promote the accumulation of capital, fair competition between nations and better tax law elsewhere in the world. They also foster economic growth. …Yet even if all that were true – and it is not – does it outweigh the ethical harm they do? The numbered bank accounts of tax havens are notoriously sanctuaries for the spoils of theft, fraud, bribery, terrorism, drug-dealing, illegal betting, money-laundering and plunder by Arab despots such as Gaddafi, Mubarak and Ben Ali, all of whom had Swiss accounts frozen.

But he can’t resist trying to discredit the economic argument by resorting to more demagoguery, asserting that tax havens are shadowy regimes. Not surprisingly, he offers no supporting data. Moreover, you won’t be surprised to learn that the real-world evidence directly contradicts what he wrote. The most comprehensive analysis of dirty money finds 28 problem jurisdictions, and only one could be considered a tax haven.

Last but not least, the author addresses the issue that really motivates the left – the potential loss of access to other people’s money, funds that they want the government to confiscate and redistribute.

Christian Aid reckons that tax dodging costs developing countries at least $160bn a year – far more than they receive in aid. The US research centre Integrity estimated that more than $1.2trn drained out of poor countries illicitly in 2008 alone. …Some say an attack on tax havens is an attack on wealth creation. It is no such thing. It is a demand for the good functioning of capitalism, balancing the demands of efficiency and of justice, and placing a value on social harmony.

Let’s now shift from the inaccurate ramblings of a left-winger to some real-world evidence. The Wall Street Journal has an article on the Canton of Zug, Switzerland’s tax haven within a tax haven. This hopefully won’t surprise anyone, but low-tax policies have been very beneficial for Zug.

Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it. Zug’s history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them. …If Switzerland is the world’s most famous tax haven, Zug amounts to a haven within a haven.

Here’s some of the evidence of how better fiscal policy promotes prosperity. This is economic data, to be sure, but isn’t the choice between growth and stagnation also a moral issue?

Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get. …businesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies’ efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn’t belong) is 9.4%, Zug’s is 1.9%.

It turns out that Zug is growing so fast that lawmakers actually want to discourage more investment. What a nice problem to have.

Describing Zug’s development as “astonishing,” Matthias Michel, the head of the canton government, said, “We are too small for the success we have had.” …Zug has largely stopped trying to lure more multinationals, according to Mr. Michel.

…the Swiss are mostly holding fast to their fiscal beliefs. Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.

40 Responses

Daniel, I agree with you on the role of tax havens (better to be called “asset havens”) for the benefit of those honest business people living in countries where there is government corruption or persecution of one sort or another or rampant inflation.

But for the wealthy, who enjoy the benefits of living in a democratically governed country whose economic policies allowed them to accumulate riches in the first place to then move their assets to a country, which will not report the investment income is unseemly and dare I say unpatriotic. An example of one such person is the Russian American California real estate billionaire, Igor Olenicoff. Olenicoff was sentenced to 8 years in prison for tax evasion and his Swiss bank, UBS, paid a fine of $780 million to the US Government for helping him and many others avoid paying taxes.

Speaking of UBS and other Swiss banks, German clients held 280 billion of undeclared Swiss franc assets and Swiss banks may pay up to 15 billion in francs as a penalty to German tax authorities. See HERE.

Daniel, maybe by spending a night in a Mexican “cárcel,” you would have seen the light and stopped defending super wealthy tax scofflaws.

But for the wealthy, who enjoy the benefits of living in a democratically governed country whose economic policies allowed them to accumulate riches in the first place to then move their assets to a country, which will not report the investment income is unseemly and dare I say unpatriotic.

As opposed to the infringement upon one’s unalienable rights, when Progressive demagogues leverage democracy to confiscate that earned wealth to jam their socio-economic morality down our throats?

Now THAT’S unpatriotic, in that it is a contradiction of the primary mission of ANY legitimate government … to secure our unalienable rights. And it is an infringement of those rights when government takes your wealth/income to finance activities that do not directly support that primary mission.

Our “wealthy” may not be having their lives and liberty threatened by oppression … but their ability to pursue happiness is being infringed upon by the soft, cuddly fascism of Progressives who “know better” than you do how to live your life.

And when they are threatened … so are we. Why do you think job creation dried up starting in EARLY 2007? Could it be that businesses responded to the takeover of Congress by the Progressive cash-cow dairy farmers?

Art R., no one is “enjoying the benefits of living in a democratically governed country whose economic policies allowed them to accumulate riches.” If that were true, tax havens would not need to exist. We need them because parasites like you find stealing easier than working, especially when you don’t have to take the natural risk of the “victim” shooting you.

Excellent post! I’ve been in the reinsurance business for over 35 years, with over 25 involving off-shore domiciles which allow the formation of “captive” insurance companies. These vehicles allow their owners to side-step the onerous regulatory environments of their home jurisdictions regarding issues such as taxes (on premium), capitalization requirements, investment considerations and underwriting/pricing determinations, to name but a few. In some few cases, a U.S. “parent” of the captive may itself redomicile to the off-shore location. More frequently, the benefits of owning and operating the off-shore subsidiary more than pay for its existence. In the example given by the Senator from N.D., I would wager that a goodly number of the 12,000 companies registered at that Cayman address are, in fact, legitimate captive insurance companies providing their parent organizations with one more financial tool to compete in the international arena.

P.S. One anecdotal by-product of Obmacare is a considerable interest in the use of captive products to meet the law’s requirements.

Art R.: “Daniel, I agree with you on the role of tax havens…for the benefit of those honest business people…But for the wealthy…”
OK Art….so your position is that laws should be applied when “good” results ensue for “good” people, but not when a law creates a “bad” result for “bad” people. hmm…a few questions:
1. Who decides ? You, Art? No offense, but ‘no thank you’. When you find an omniscient angel to act as benevolent dictator, then please let us know. Til then, I’ll rely on my understanding on human nature, framed by the experience of ‘benevolent totalitarians’ of the 20th Century, who murdered and starved 150+ million.
2. What is your evidentiary basis for challenging the proven record of “the rule of law” including private property rights? Where is the historical evidence that disregarding private property rights leads to societal progress?
3. Aren’t you, as President Obama has said about himself, a “citizen of the world”? Why the narrow parochial obsession in one nation-state?
4. In denouncing the greed of the wealthy, it seems you use a microscopically narrowed definition of ‘greed’. When a politician pursues the accumulation of political power, isn’t that a pursuit of self-interest? Isn’t that just another personal preference among the many flavors of greed? Should there be any limit to the greedy pursuit of political power, or of those already wealthy with it? (one difference: a businessman is not allowed to use the nation’s police power to enforce her values or pursue her goals; does a politician’s use of the state’s monopoly on physical violence to achieve her goal make her objectives more pure?)

Just had this conversation with my mom, who was complaining about the “rich” avoiding taxes. Right, there are greedy people out there. But, if the number of millionaires in a state goes down when taxes go up, that means that those millionaires were willing to pay taxes before the rates went up. They accepted those taxes, but were unwilling to pay these higher taxes.

Absolutely moral. Governments have no monopoly on morality, I don’t care whose they are or who they think they are. Governments are just people, and not necessarily better people than anyone else. The myth that government is always a “force for good” and therefore always moral must be once and for all destroyed if humanity is ever going to make progress.

“But for the wealthy, who enjoy the benefits of living in a democratically governed country whose economic policies allowed them to accumulate riches in the first place to then move their assets to a country, which will not report the investment income is unseemly and dare I say unpatriotic.”
That doesn’t make any sense. The economic policy that “allows” individuals to accumulate riches “in the first place” is the absence of an onerous tax and regulatory environment. What you at least seem to be saying is that one’s patriotic duty for not being subjected to an onerous tax and regulatory environment is to submit oneself to an onerous tax and regulatory environment.

If I have money invested here in the US and I am paid interest for the use of that money, or the value of my investment increases, then a taxable event has occurred here in the US, and I am properly asked to pay taxes on my resulting gain.

If I have money invested in France, and I make a profit from that investment, then a taxable event has occurred in France, and I am properly asked to pay taxes to France on my resulting gain.

If I have money invested in some country that does not try to take part of my profit, what business is it of the US government’s? I have not made a profit within the US, so no taxable event has occurred there, which should be the end of the US’s interest in my affairs. My profit would not have been made “due to” the US system, and I have already been taxed by the US when I originally made the money that forms the principle of my foreign investment, so I have not shortchanged anyone.

At that point, I am simply interfering with your desire to confiscate my money. I don’t give a rat’s butt if you think I have “enough” money to justify your high confiscation rates – that’s your problem. You ceded the moral high ground when you adopted “progressive” taxation rates. Come cry to me right after you adopt a one-rate tax sys

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